From USD 52,700 at the start of Tuesday the 7th, bitcoin fell that day to USD 42,900.
After a quick rebound, bitcoin has fluctuated for two days around USD 46,000.
Amid the anticipation created by bitcoin’s entry as legal tender in El Salvador last Tuesday, September 7, the biggest drop in bitcoin’s price this year followed last May’s decline. A series of downward price movements in the early hours of the morning were followed by steeper drops of up to 16.9% from that day’s initial value.
, published last Tuesday the 8th, states that while the decision made by El Salvador may have had some influence on the initial declines in the price of BTC, the real reason was a rapid succession of liquidations.
“As is often the case, the sudden drop was likely due to a series of liquidations of heavily leveraged futures positions. More than USD 2.3 billion was liquidated last Tuesday, the largest magnitude since May 19,” the report said.
The price of BTC had been on the rise, rising from USD 39,300 on August 1 to more than USD 52,000 on September 6, the analysis notes. “But on September 7, the markets fell precipitously and BTC dropped to USD 43,200, a drop of nearly USD 10,000.”
BTC’s price drop on Tuesday the 7th was nearly 17%. Source: Coin Metrics.
Leverage allows the potential returns of a futures contract to increase, the analysis states. “Effective use of leverage allows a trader
to put more capital into a position than he or she holds. But using leverage also amplifies risk,” the study explains.
As a position becomes more leveraged, particularly for long positions, small price declines can lead to liquidation. While traders
have collateral funds that cover a certain percentage of the drawdown, in cases of high leverage, losses can exceed that margin, leading to liquidation.
The study explains that liquidations in turn put pressure on prices. When long positions are liquidated, exchanges may be forced to sell, which is downward pressure on the spot price. This means that settlements can lead to more settlements, or what are called cascading settlements, which sometimes cause sharp movements in the spot
price, the study notes.
Although high levels of leverage have historically been allowed in the bitcoin and other cryptocurrency futures contract markets, recently FTX and Binance <a href=”https://www.criptonoticias.com/mercados/trading-bitcoin-apalancamiento-restringido-binance-ftx/” target=
, as reported here.
But these reductions apparently had little impact on the number of leveraged futures contracts opened, according to the analysis. Futures open interest had grown to May levels before the Sept. 7 drop occurred, Coin Metrics claims.
By Tuesday, Sept. 7, futures open interest had grown to last May’s levels. Source: Coin Metrics.
The rise in open interest, in addition to indicating that more contracts are being opened and additional money is entering the market, also gives a measure of leverage, the paper argues. “If there is a relatively high amount of open interest, it is very likely that there is a large amount of leverage in the futures market, as contracts are often opened using leverage. As large settlements occur, open interest can begin to decline rapidly as the market declines.”
The chart below shows bitcoin’s open interest. This had risen, prior to Tuesday’s trading on Tuesday the 7th, to USD 19.8 billion. However, this local high was well below the April 12 peak of $23.5 billion and the May high of $21.1 billion, says Coin Metrics.
The drop in the BTC price precipitated the plunge in BTC open interest.
While the chart warns that the drop in BTC’s open interest reached a value of more than USD 15 billion, the report does not give an exact figure. A similar chart from The Block gives the values before and after the crash: USD 19.41 billion and USD 15.4 billion.
The Block estimates the drop in BTC open interest in USD at USD 4.01 billion. Source: The Block.
Bitcoin market analyst Will Clemente, meanwhile, confirms that liquidations were the primary cause of the market drop, and offers additional data on the sharp decline, in his most recent market bulletin
. USD 1.23 billion of long positions were liquidated, leading to a drop in open interest of USD 4.4 billion, Clemente says.
Among other points, the analyst notes that the predominant sales were of young coins and that long-term holders (LTH) did not sell, but rather increased the BTC held. The whales acquired
The analyst said that the market crash this week does not invalidate the market structure and the bullish outlook for bitcoin.
For the analyst, this week’s market crash does not invalidate the market structure or the bullish outlook for bitcoin.
So, has this event changed any of the broader trends we’ve been following? The answer is no. In fact, these accumulation trends have only strengthened. Exchange inventories are down another 25,733 BTC (~ USD 1.18 billion) this week, reflected by our supply shock metric. We also saw an increase in coins moving into strong hands reflected by our illiquid supply shock index this week, including a positive boost on Tuesday.
In the chart below, we note the momentum of the different supply shock curves over the past seven days.
The increase in supply shock over the past week is a bullish sign, says Will Clemente. Source: Glassnode.
Meanwhile, analyst Willy Woo agrees with Clemente on BTC purchases by whales this week. “Contrary to common opinion, the recent pullback in bitcoin’s price was not due to whale sales of BTC. These have been in a clear buying region,” Woo says in a tweet
The price of BTC continues to fluctuate downward in recent days. This Saturday the 11th shows a slight recovery after hitting a low of USD 44,400 on Friday night, and is trading at the time of writing at USD 45,745, according to the CryptoNews price index
An over-leveraged market with a lot of futures open interest can pose a systemic risk to the price, as what could be a minor drop in the case of moderate leverage turns into a large correction from cascading futures settlements.